Fixed rate ending in the next 3-6 months? Prepare for higher repayments with these 5 steps

The cost of living is putting pressure on Aussie households, so the Reserve Bank of Australia (RBA) has started raising the cash rate in an attempt to curb inflation.

This has meant lenders are hiking interest rates on home loans and repayments are going up.

If you’re on a variable interest rate, chances are you’re already paying more on your mortgage. But if you’re on a fixed rate, you won’t have felt the sting – yet.

In this article, we explain how and why interest rates are increasing in Australia, as well as how fixed interest rates are being affected. We also provide some tips on how to get ready for higher repayments once your fixed term ends.

Why are mortgage repayments rising?

In November 2020, the RBA dropped the cash rate to an all-time low to try and stimulate the economy. Since then, borrowers have enjoyed ultra-low home loan interest rates.

The economy has been recovering rapidly, and as a result, inflation is rising more quickly than anticipated. So, in May this year, the RBA began increasing the cash rate in an attempt to get inflation under control.

This is because raising the cash rate bumps up interest rates, which means people are less likely to want to borrow money. In turn, the reduced demand for housing dampens the rate of inflation.

At this point, the cash rate will continue rising until the RBA can get inflation to its target of 2-3%.

Borrowers with variable rate home loans have likely seen their repayments increase already. But borrowers on fixed rates won’t feel the effects of rising rates until the end of their fixed term.

How are fixed interest rates being affected?

Although fixed rate borrowers are protected from interest rate hikes for the time being, this won’t be the case for much longer.

Fixed interest rates have been going up for a while now and are not at the lows found in 2020 and 2021.

Fixed rates on longer fixed term periods are slightly higher. This is because lenders are factoring in future cash rate hikes to cover their costs.

You might choose to lock in another fixed rate when your current one ends, or you might change to a split loan or a variable interest rate. Whatever you decide, chances are you’ll be on higher repayments.

What works for you will depend on your financial situation and your needs. For example, do you prefer the security of a fixed rate or do you like the freedom and flexibility of a variable rate?

Whatever your preference, there are some ways you can prepare for higher repayments once you get off your fixed rate.

How to prepare for higher home loan repayments when your fixed term ends

1. Take action on your loan

The first step in getting ready for increased mortgage repayments is being proactive about your home loan when your fixed term is ending.

You might not get the most competitive deal available to you if you let your loan revert to your lender’s standard variable interest rate.

This is because lenders often charge existing borrowers a ‘loyalty tax’ – that is, a higher interest rate than what new borrowers receive.

Instead of leaving your loan to revert, look over your options carefully. It could be worth doing some research to see what type of loan – fixed, variable or split – will meet your needs and help keep your repayments down.

2. Reach out to an expert for help

You might want to chat with a Home Loan Specialist before your fixed rate term ends.

Talking to an expert about your home loan can help you work out what will be the best move for you.

A Home Loan Specialist can conduct a review of your home loan and compare your options.

3. Review your household budget

Doing a review of your household budget before your fixed rate ends could help you find ways to save money as your home loan repayments start to go up.

If you can find room in your budget to cut back, now may be the time to do so in preparation for higher mortgage repayments.

It might be difficult to save on everyday expenses like groceries and petrol while the cost of living is high. But, you could look to your electricity, internet and insurance providers to try and get a better deal.

You might be able to save money by comparing what’s on the market and switching providers, especially if you haven’t compared prices on expenses like home and contents insurance or electricity in a while.

You could also look to your discretionary spending on expenses like takeaway food and entertainment to free up space in your budget.

4. Make extra repayments

If you’re on a fixed rate loan that allows extra repayments (like our 5 Star Home Loan), it could be worth using this feature before your fixed term ends.

Making extra repayments up to the fixed term cap can give you a buffer when rates rise.

This is because you will have paid off more of your home loan, which could be useful if future rate hikes make it difficult for you to make your monthly repayments.

5. Break your fixed rate term to fix again now

If it makes financial sense, one option could be to break your fixed term before it ends so you can fix your rate again now, before interest rates rise even further.

By doing this, you could get ahead of future rate hikes and protect your mortgage repayments from interest rate fluctuations.

Say you still have 2 years left on your fixed rate term – breaking this term now to re-fix your rate could save you more. This is because fixed rates are likely to have risen even further by the end of the 2 years.

But, it’s important to carefully consider whether the costs of breaking your fixed term now will outweigh the money you’ll save by getting ahead on rising interest rates.

Speaking with an expert can help you decide what to do to prepare for higher repayments once your fixed rate term ends.

Our lending specialists are available 7 days a week at a time convenient to you, either in person, on the phone, or via web chat.

Our aim to make home loans simple for you.

This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.